To Manage Political Risk, Be Agile [opinion]

(AllAfrica Via Acquire Media NewsEdge) The year has started with a bang. Politically, the country will remain on the radar for some time.

To the political risk analysts, the gods have conspired to make Kenya a major point of interest. Debate on the exact date the next polls will be held is not over. Kenya is also at war with the Somalia militia group, Al-Shabaab.

However, nothing has shaken the political arena recently as much as the landmark ruling delivered by the International Criminal Court in The Hague.

The Pre-trial judges confirmed international crime charges against four Kenyans.

Political risks are challenges that firms may face as a result of what are normally referred to as political decisions. They can be firm-specific -- threats of expropriation, breach of contract, sabotage, or even boycotts. And they can be country-level risks, say mass nationalisations, regulatory changes, currency controls, civil wars and post election violence.

Political risk over a period preceding a historic General Election can never be a far-fetched reality. The events that ensued after the 2007 polls in Kenya add a lot of credibility to the assertion.

The ICC decision can affect the political risks field two-fold. Firstly, by tightening the noose around the necks of top government officers, the ICC may have made the best shot ever at taming the run-away impunity in Kenya.

Secondly, the decision to charge some of these individuals with near fanatical following in their backyards could stoke the embers of post election violence.

The business community should be at the drawing boards, laying strategies on how to manage expectations this year in light of the inherent political risks. Kenya faces the first General Election under the new Constitution.

The changes expected are far-reaching. My hunch is, if we get it wrong, the impacts will take years to correct.

International investors take political risk seriously. Some political decisions can turn around a business's fortunes forever. Sample this: when Venezuelan President Hugo Chavez hastily announced nationalisation of CANTV, a local telecoms firm, the company's shares in the bourse nose-dived -- by almost 50 per cent -- as investors tried to cut on imminent losses.

The conduct of the General Election and the ability to make a near seamless transition will determine the future of our economy.

So how can a business manage political risk? Managing political risk may involve researching potential risks early enough and crafting credible strategies to minimise them. A firm can consider taking political risk insurance cover. However, the downside is that the cost of insurance can be quite exorbitant.

Secondly, a firm can choose to put in place a robust risk management function. Such an independent function is better placed to proactively monitor political risk and recommend measures to mitigate losses.

Thirdly, a firm needs to understand the difference between micro and macro level risks. Micro level risks affect the industry while macro level risks affect the larger economy, for instance, interest rates and foreign exchange rates. The treatment and reaction to the two sets of risks should be different.

Lastly, diversify. Investors who trade across borders understand this strategy better. It's prudent to diversify investments globally.

Macharia Kihuro is a risk management practitioner at Panafrican Housing Financial Institution, Shelter Afrique, headquartered in Nairobi.

Copyright The Nation. Distributed by AllAfrica Global Media (allAfrica.com).

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